Committed to Research

Digital asset management is one of promising applications of blockchain technology. Blockchains could provide principal disintermediation between digital asset issuers, application developers and consumers and decouple tasks related to asset management, such as issuance, transaction processing, securing users’ funds and establishing users’ identities. This paper outlines basic components of blockchain-based asset ledgers, as well as their use cases for financial services and for emerging Internet of Things and consumer-to-consumer markets. We describe existing and prospective deployment models for asset ledgers, including multi-asset blockchains, colored coin and metacoin protocols. This paper focuses primarily on Bitcoin-based services and, to a lesser degree, on public blockchains in general.

We estimate incentives to notarize transactions on the Bitcoin blockchain at about $5 million daily by 2020 (which is five times more than the present value) and at $50–100 million daily by 2025. By 2020, transaction fees could constitute 50% or more of the notarial incentives due to increasing velocity of Bitcoin and the increased value secured with the Bitcoin blockchain; the amount of transaction fees as a percentage of total incentives could grow to 80–90% by 2025. The growth would be achieved due to both the increase in transaction fees and the growing Bitcoin exchange rate. With the stabilization of Bitcoin markets and the increasing role of transaction fees in notarial incentives, the role of the Bitcoin exchange rate is expected to diminish.

We provide a description of permissioned blockchain systems that could be used in creating secure ledgers or timestamped registries. We contend that the blockchain protocol and data should be accessible to end users to provide a higher level of decentralization and transparency and argue that proof of work could be effectively used in permissioned blockchains as a decentralized and auditable means of providing and diversifying security. We describe merged mining and blockchain anchoring concepts, which would be instrumental in implementing proof of work security for permissioned blockchains.

There is currently an ongoing debate whether the existing blockchain-based systems (such as Bitcoin and other cryptocurrencies) can be utilized as is in proprietary contexts, and whether their openness and censorship resistance are fitting properties in this case. We provide arguments for the use of permissionless blockchains and open, standardized blockchain protocols in creating ledgers and registries, devoting particular attention to the Bitcoin blockchain as the most commercially successful and secure permissionless blockchain. We argue that many permissioned applications could be effectively implemented using existing technologies on top of existing permissionless blockchains:

• Colored coins protocols could provide a means to encode transfer of arbitrary assets into ordinary transactions, thus extending the utility of public blockchains for financial institutions.
• Similar protocols could enable timestamping documents, assisting in development of decentralized timestamped registries.
• Payment channel networks could streamline payments by creating a scalable peer-to-peer layer on top of permissionless blockchains.
• Sidechain technology could be used to integrate permissionless and permissioned blockchains into a single interconnected environment. Sidechains could be used in cases when the protocol of the underlying permissionless blockchain is too restricting (e.g., in terms of transaction throughput or the required maximum settlement period).
• Transaction processing by known validators could be used to achieve regulatory compliance.

Download full document:

We consider several problems and possible attack vectors arising in proof of stake cryptocurrencies:

• "nothing at stake" problem
• initial distribution problem
• short range attacks (e.g., bribe attacks)
• long range attacks
• coin age accumulation attacks.

We estimate the cost of various types of attacks on proof of stake currencies and compare it with the cost of similar attacks on a proof of work currency. The cost of attacks on proof of stake is shown to be significantly lower.

We also consider delegated, or deposit-based, proof of stake consensus as an ongoing evolution of basic proof of stake. This version of proof of stake is more resistant to attacks and could potentially be a formidable opponent to proof of work, when it is sufficiently tested in practice and gains a foothold. On the other hand, just like basic proof of stake, delegated systems require a combination of algorithmic and social-driven security; the social component of proof of stake currencies could weaken their decentralization and mathematical soundness.

We have thoroughly studied all block size increase proposals and find that Jeff Garzik's BIP 100 proposal is the most reasonable and considerate one. We think that the block size debate must be resolved by a consensus and the voting mechanism introduced in BIP 100 is a good way to achieve such a consensus. The forecasts of growth of the Bitcoin network made in other proposals don't provide enough predictive power, so in such case the cost of mistake is extremely high. The power to make such future defining decisions must belong to the community. Ultimately, it is up to all network participants to decide what number of full nodes is sufficient to preserve decentralization, not just hardware growth trends. We believe that BIP 100 is the best solution in this regard.

Please see the extended report below:

One of the advantages in using Bitcoin as a medium for smart contracts is the inherent low trust approach. Built-in Bitcoin mechanisms let users minimize counterparty risks by utilizing mathematical and algorithmic tools, not by relying on a mediator’s authority, as is often the case in the traditional approach.

Bitcoin is criticized because of the insufficient expressive means for smart contracts. The Ethereum project launched on July 30th, 2015 was developed as a replacement of the Bitcoin protocol specifically targeted for smart contract users. Because of the critique, the following questions arise:

• what possibilities and perspectives does the Bitcoin protocol have as a medium for smart contracts?

• what are the main drawbacks of Bitcoin compared to the alternatives (e.g., Ethereum)? Can these drawbacks be eliminated or alleviated while staying within the protocol?

This report studies possible smart contract applications for Bitcoin and outlines directions for further research.